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Americans Are Woefully in the Dark About Retirement Plans, Data Shows

It's time to get schooled.

Since Social Security doesn't provide enough income for seniors to live comfortably, it's on working Americans to save for their golden years by contributing to an IRA, 401(k), or even both. But new data from TD Ameritrade reveals that a large chunk of U.S. adults know relatively little about these plans.

Let's start with 401(k)s. When asked what the current annual contribution limit is, only 19% could correctly identify it as $19,000 (keeping in mind that workers 50 and over get a $6,000 catch-up option on top of that). Meanwhile, 27% said that 401(k) contribution limits depend on income, and 12% thought the current limit was $18,500, which was the limit for 2018. Furthermore, 9% thought there was no limit to how much you can contribute.

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Those surveyed didn't do much better on the IRA front. Only 35% knew that the current annual contribution limit for IRAs is $6,000 (with an additional $1,000 catch-up contribution for workers 50 and older). On the other hand, 25% thought the limit was income-dependent, 16% thought the limit was $5,500 (which was the limit for 2018), and 4% thought IRAs didn't impose a contribution limit at all.

Another interesting finding regarding IRAs is that 60% of those surveyed thought that to contribute to an IRA in the first place, you need to be in a certain tax bracket. Some of this confusion might stem from the fact that higher earners are barred from contributing to Roth IRAs directly. But anyone with earned income can fund a traditional IRA, regardless of tax bracket or income level.

If you're clueless as to how 401(k)s or IRAs work, it pays to invest some time into learning more about them. Otherwise, you might mismanage your savings and suffer for it once retirement rolls around.

Understanding your 401(k)

If you have access to a 401(k) through work, participating is a relatively simple matter of instructing your HR or payroll department to allocate a certain portion of your earnings to that account, up to the annual limit. That money will then go into your 401(k) on a pre-tax basis, thereby shielding more of your income from the IRS.

Once you have money in your 401(k), you get to choose how to invest it. Your plan should offer a number of investment funds with differing fees and strategies, so be sure to read up on each one before making your selections. Keep in mind that index funds are typically a far more affordable investment option than actively managed mutual funds. Most 401(k) plans have a mix of both, so take a look at your choices and see which best align with your risk tolerance and goals.

Another thing you should know about 401(k)s is that employers often match worker contributions to a certain degree. Your company, for example, might contribute up to 5% of your salary if you put in the same. Be sure to understand what your company's matching provision entails so that you can take advantage of it. Otherwise, you're effectively leaving free money on the table.

Learning your way around your IRA

If you don't have access to a 401(k) plan through work, an IRA is your next best bet. The only disadvantage IRAs have to 401(k)s is their lower contribution limits, coupled with the fact that employer matching dollars don't come into play. Another slightly tricky thing about IRAs is that you need to fund them actively, whereas with a 401(k), your employer takes care of deducting money from your paychecks and putting it into your account. That said, some IRAs do offer an automatic transfer feature where money gets sent directly from your savings or checking account on an ongoing basis.

One benefit of having an IRA is that you'll generally get more investment choices than you will with a 401(k). While 401(k)s generally allow you to invest in various funds, with an IRA, you can invest in individual stocks as well. To do so successfully, you'll need to do a fair amount of research, but it's a worthwhile investment if it means setting yourself up with a strong portfolio.

Now that you know a little bit about 401(k)s and IRAs, you can take steps to sign up for one and start building wealth for the future. That said, the above is really just a snapshot of how these plans work, so for some further reading, check out this guide to 401(k)s, as well as some more detailed information on IRAs.

Finally, this guide to saving for retirement in 2019 will review all of your plan options and their respective contribution limits, keeping in mind that if you're self-employed, you have several other plans to choose from on top of the ones covered here.

Author

Maurie Backman is a personal finance writer who's passionate about educating others. Her goal is to make financial topics interesting (because they often aren't) and believes that a healthy dose of sarcasm never hurt anyone. In her somewhat limited spare time, she enjoys playing in nature, watching hockey, and curling up with a good book.